Community Banks – The Gold Standard

Community Banks – The Gold Standard

How many business owners do you know of that have been invited by the bank to leave the bank? If you’re not sure what I am speaking of, let me introduce you to this practice.

A business is run for many years and operates perfectly. This same business goes through a management change and some poor operators are brought in by the owners, unknowingly. It is two years before the poor management practices show up and it causes the business to lose money for a 24-month period. The owner makes the needed changes and brings in a more qualified management team and now has the business on the correct path again which immediately returns the business to profitability.

It doesn’t really matter to the banking partner that the company has done it’s banking business with for over a decade. The bank calls the loans and forces the business owner to pay off all of his lines of credit. If you are in business, you know how hard any loan with any bank is but if you have two years of losses, no new banking relationship is going to issue you a new line of credit. This is the reason that business owners need to always watch who they are in a banking relationship with.

The big box banks – no reason for me to name them here, you know who they are – exit certain types of businesses on a regular basis. When they exit those categories of business, if you are banking with them, they call your loans and tell you to leave. If you don’t have the funds to pay off the loans or the ability to obtain new financing quickly, they can charge off your loan – causing credit issues for you and your company or at least moving your perfectly paid account into the “troubled asset” category.

When we work with clients, we have the ability to make sure that we have several lending partners available for our business owners. Any bank or regulated lender can change their portfolio appetite without notice and when the bank wants out of an industry – they get out. Thus the reason for several banking relationships. The banker begging for your business today could be the banker begging you to leave tomorrow.

Again, these business owners had done nothing wrong; paid their accounts on time every month; never had a financial covenant violation (another topic for discussion later); but were still asked to leave the bank. If you don’t have multiple banking relationships or the ability to work with a company like ours that has multiple banking relationships, you could be frozen out of the financing that you need to keep your business alive and growing.

Your big box banks are run strictly by numbers. If your business doesn’t fit inside their numbers, they don’t want your business. Common sense is not a real factor in banking with a big box bank. The unfortunate truth is that most big box banks would rather not even make loans to small business owners. They are looking for the income from trading and selling commodities or in financing super companies – that is companies with a financing need north of $50,000,000. Anything less really does not move the needle in their bank and they are simply not interested in those deals.

So what’s the answer? It’s simple; community banks. Community banks are usually dedicated to working in their communities – thus the name – and have a vested interest in working with business owners, should a problem or issue arise. The other great news about working with a community bank is that is where you will normally find the practice of still using common sense in making a decision to loan money to a business or to not loan money to a business. Community banks have local loan committees and are more knowledgeable as to the economics of the area they serve. Your big box banks have centralized underwriting and so you may be in Nashville, TN but the credit decision on your loan will be made by a credit committee located in the Carolinas – if it even gets to the credit committee. Many times in a big box bank, the underwriting process for a loan approval is completed by an underwriter in another state who simply can’t believe the real estate values they are seeing for another part of the country and so they simply decline the transaction and move to the next deal.

You have to remember that big box banks look at 100 deals to approve 5 deals and end up funding on average 2 of those 5 deals. How do you like those odds? If I am a business owner (and I am) I want the odds to be “forever in my favor.” How I have the best chance of working with better odds is with a great community bank network and staying away from the big box banks.

Many will say they would love to work with community banks but that community banks can’t lend as much as the big box banks can. In a lot of cases that can be true. One of the companies that we are a part of is Banc Access. We have partners that are community banks that own this company with us. Banc Access is a conglomerate of community banks that work together to provide new loan origination to community banks. Another major part of what Banc Access does is that we provide a platform for community banks to participate on larger deals. As of this writing we are processing two major deals through our network. One is a $68,000,000 project and the other is a $16,000,000 project. To complete these loans, we will put together a group of community banks on each loan request. There is no doubt that it is more work on our part to complete deals like this but the end result is more than worth it.

If we have 3 or 4 community banks that underwrite and fund one of these loans, what are the chances that all the community banks will want to exit this type of industry at the same time? No chance that happens. We might have a bank that changes direction and wants to exit the industry but then we would simply find another community bank to take their place – never upsetting the loan performance or structure.

Another great advantage to using a community bank network is that many times we can structure the terms that make the loan more beneficial to the business owner. On a recent deal completed through our community bank network, we were able to get a 7-year term instead of the standard 5-year term. This made all the difference to the client and we were able to make the loan a win-win for everyone involved. The community bank received a great loan with a fair rate and the client received the 7-year term they were looking for on an asset class the big box banks and regional banks would have never considered for more than a 5-year term.

Community Banks have the highest borrower satisfaction for a reason and second place is not close. Community Banks are the partner that every small business owner needs to be successful.